The action of Modi government to demonetize Rs 500, Rs 1000 notes to combat black money and counterfeit notes is an attack on the common man through the monetary system, which is unparalleled in its stupidity, cruelty and deviousness in the whole of Indian history.

To look for a close parallel to this action, we will have to travel back to about 700 years to the reign of Mohammed bin Thuglak, sultan of Delhi in the 14th century. Thuglak’s name is etched in history for introducing debased coins, ruining the economy of the country, and rolling back the measure after meeting with a severe setback.

Now, we have the 21st century Thuglak in the person of Modi. Only an individual schooled in the Hindutva – RSS ideology, with megalomaniacal pretensions of greatness for himself, surrounded by equally head strong “intellectuals” scheming to impose their “Vedic” world view on the nation, can come up with such a wooden headed measure.

What is the economics of cash in a capitalistic market economy?

1. In India 92% of workers are in the unorganized sector and receive daily, weekly wages or monthly salary of less than Rs 10,000. In addition, the huge peasantry also leads a hand to mouth existence.

Working class and peasantry receive cash as income and spend it on purchase of essential commodities. They try to squirrel away meagre amounts as savings for future needs such as medical emergencies, children’s education or wedding ceremonies etc. Generally, they spend whatever they receive immediately. In recent times, they are negative savers with heavy borrowing for education, health care and even for day to day necessities.

2. Shop keepers, merchants and traders exchange their goods and services with working class and peasantry for money.

3. Companies and small businessman use money to pay wages, and to spend on petty expenses.

These are the legitimate, legal circulation need of cash.

4. Black money circuit also takes a hefty part in the cash circulation. Black money when in circulation is in no way distinguishable from “white” money.

What are the sources of black money?

A. There are cash hoards by small businessmen stashed away from regular business activities and accumulated for future purchase. (This is almost similar to the savings by working class, housewives, domestic workers, old people and farmers). They might be keeping it for

real estate purchase of land or house

admission of children into private educational institutions

medical expenses

to pay bribes

All these activities require cash, preferably in black, from the common man. Without cash, a person can not enter into these transactions.

Parallel economy of corporates, and financial dealers

B. In addition, there is a huge parallel economy operating which is not reported to tax authorities, not accounted for and not tax paying. The size of parallel economy in India is estimated to be more than 80% of GDP.

Traders in agricultural commodities, hardware, clothing merchants form the mainstream enablers of this parallel economy, operating outside the tax-man’s net.

Foreign Investment (FDI, FII), Stock Markets, Currency Exchange Markets, Commodity Markets are the sophisticated face of these parallel economy. They work with proper legal documents which leave a trail of transactions but they force governments to make the laws to suit their parallel economic activities.

Corrupt government officials and political parties form an alliance with these illegal operators.

Each one of the above categories, might hoard cash as only a part of their total business. Majority of their assets would be in stocks, commodities, buildings, and overseas accounts. To grease the wheels of business they too need cash. Withdrawal of currency notes will put their operations also into difficulties, but they are better equipped and better networked to deal with the current cash crunch than a common man.

Bad money (Rs 500, Rs 1000) will drive good money (Rs 100, new currency) out of banks. Banks will pile up huge mountains of Rs 500, Rs 1000 notes. 100 rupee notes will vanish as soon as they come in.

The government is throttling the supply of Rs 100, Rs 500 denominations. But, the existing notes (about 14% of total value), of about Rs 2 lakh crore worth will keep circulating with a higher velocity. Hoarders of 500, 1000 Rs will capture these Rs 2 lakh crore (accumulating with traders, whole salers) circulation to convert their Rs 500s. The 500s thus exchanged will find their way to the bank. The 100s will be put in circulation by the hoarders which will complete their role as exchange intermediaries and be ready to serve as second round of laundering 500 Rs, 1000 Rs notes.

Even with 2 such rounds, Rs 4 lakh crore of unaccounted cash can be laundered. With a couple more rounds, it will clear everything.

Economic disruption

With the money supply curtailed, the economy is grinding to a half leading to severe economic disruption. Sales of white goods, cellphones, restaurants, vessels, clothing etc fall; trucks are off road; agricultural activities are grinding to a halt; construction work is stalled. There will be a huge setback to the economic growth in the months to come.

The intensity of the squeeze will drum scientific economics even into the heads of the the Vedic, Hindutva “economists”. Warning bells will be ringing in trader, corporate circles. The government has to either back off or push out more new notes in 100s, 500s.

With the pressure of commodity circulation, old 500, 1000 rupee notes which Modi, the megalomaniac, declared to be mere piece of papers, keep circulating and changing hands.

If the government persist in not providing enough 100 Rs, new 500 Rs notes, the circulation will be hindered and economy will be choked. The growth rate of economy will plummet in the 3rd and 4th quarters.The scope for pushing in counterfeit notes will increase with the increased demand for currency.

This will be lose-lose for government either way.

Modi’s tears are tears of a megalomaniac, tears of a bloated ego being pulled down, tears of losing out on the power game. Powerful sections of ruling class might even plot to overthrow Modi and bring a more suitable candidate to power who will act with some sense of balance.

But the masses will continue to suffer, until they resort to the new democratic action of taking power into their own hands.